Kevin Drum - July 2012

Matt Yglesias tries to referee a dispute between partisans of Tim Geithner, who say that bank bailouts were a critical part of getting the economy running again, and partisans of Neil Barofsky, who say the Obama administration should have spent more time bailing out underwater homeowners who were crushed by the housing bust:

So who's right? I think this is actually a much more difficult question than partisans on either side are willing to acknowledge. Team Tim has bolstered their argument with the overblown notion that homeowner bailouts "launched the Tea Party" via Rick Santelli and are therefore politically impossible and thus one doesn't even really need to address the merits of the case. On the other hand, Team Neil has never really presented a coherent alternative course of action that takes real account of the consequences of imposing very large losses on the banks.

I say: why choose? Like it or not, Team Tim is right: the banks had to be bailed out, the same way you'd bail out electrical utilities rather than let everyone go without electricity. They're just too important to the rest of the economy. Perhaps the bank bailouts should have been more punitive (that's my view), but frankly, this is nibbling around the edges. Punitive or not, we needed to spend a boatload of money to rescue the banks.

But Team Neil is right too: consumer debt overhang has been hobbling the recovery ever since 2008, and it's outrageous that so little money was spent rescuing consumers right along with the bankers. Obama should have pushed a lot harder for cramdown legislation; Fannie and Freddie should have been enlisted to rewrite mortgages; money should have been airlifted into consumer pockets, either to spend or to pay down debt; and schemes should have been set up for homeowners who were too far gone to save that allowed them to rent their homes back from the banks that foreclosed on them.

This is basically a long way of saying that we didn't do enough and we didn't spend enough money. Yes, the banks had to be rescued. But homeowners should have been rescued too. The stimulus needed to be bigger and longer. And the Fed should have ignored the wailings of the wealthy and temporarily targeted a higher inflation rate. None of this would have stopped the recession, but it would have made it a lot shorter and shallower. It's a crime that millions have suffered needlessly because we didn't have the guts to stand up and do this.

President Obama has gotten at least a little bit of friendly fire from supporters who say that, although Republicans are taking his words wildly out of context, he's a pro and he needs to be a little more careful not to give them ammunition. But does it matter? David Weigel points to the latest bit of over-the-top mendacity from the Romney campaign, this supposed quote from Obama:

Just like we’ve tried their plan, we tried our plan — and it worked. That’s the difference. That’s the choice in this election. That’s why I’m running for a second term.

The problem with Obama's claim, of course, is that "our plan" isn't working all that well at the moment, as Jim Geraghty gleefully points out here. Except that it turns out Obama was talking about tax rates during the Clinton era vs. tax rates in the Bush era. And on that score, there's a pretty good case to be made that, in fact, the economy did a whole lot better with "our" tax rates than with theirs.

But look: there's nothing Obama could have done to avoid this. If Republicans are willing to just flat-out lie about what he said, it's impossible to self-edit your remarks enough to avoid it. We've now seen the Romney campaign make hay out of three wild misquotations:

"If we keep talking about the economy, we're going to lose," which turned out to be Obama in 2008 quoting John McCain. "What's sauce for the goose is now sauce for the gander," Romney said in his defense.

"If you've got a business, you didn't build that," a statement that quite obviously referred to the "roads and bridge" of the previous sentence. This one is so bad that supporters have taken to splicing it together with an earlier part of Obama's speech and simply removing the "roads and bridges" reference entirely.

"We tried our plan — and it worked."

As Weigel says, "At this point, getting video clips of Obama from Republican campaigns is like getting an article pitch from Jayson Blair. It might tell a good story, but you need to run down the source and triple-check."

I know I keep asking this, but has any previous campaign ever done this on such a routine basis? I don't mean to suggest that no campaign has ever been as nasty. Obviously Willie Horton and "creating the internet" and the Swiftboating of 2004 were worse. And both sides traffic in distortions and cherry picking all the time. But there's something about the methodical small lies of the Romney campaign that seems quite new. And frankly, just plain creepy.

And you can add to that the fact that virtually no one on the conservative side of the aisle has pushed back against this. Among Democrats there would always be at least a modest faction of fainthearted folks who would insist that we shouldn't descend to this level. But have any Republicans reproached Romney for these obvious lies? Or are they all like Geraghty, eager to jump in with both feet no matter what Romney says?

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Several associates now say Romney made repeated trips between Salt Lake City and Boston, where he met at times with his former partners, mostly to discuss his severance from the firm. The Boston Globe reported last week that Romney also met with his Bain partners at a 15th anniversary celebration in Palm Beach, Fla., in early 1999.

"Some were group conversations. Some were one on one," said a legal expert familiar with Romney's discussions with his Bain partners. This person, who spoke on condition of anonymity to discuss confidential business dealings, said that Romney did not relinquish his Bain ownership after taking the Olympics role but that Romney took care to avoid the day-to-day role of a corporate manager.

This is pretty much the same thing Ed Conard told Chris Hayes a week ago, and since Conard can't reasonably be described as a "legal expert," this appears to be independent confirmation of what he said. For the time being, then, it appears that the best evidence supports Romney's story that (a) he held onto his titles in order to maintain leverage during his severance negotiations, and (b) was involved very little with the operation of Bain after he left. He probably wasn't completely disengaged (the AP story says his meetings were "mostly" about severance), but it does sound as though he had only minimal operational contact.

Whether he should be held morally accountable for Bain's actions as long as he held the CEO title is a whole different question. But substantively, probably not.

After hearing about Mitt Romney's big national security speech yesterday, I finally got curious enough to read the transcript. Obviously he thinks Barack Obama has done everything completely wrong, but that's just blather. I wanted to figure out what actual, concrete proposals he made. As near as I can tell, here they are:

No cuts to the defense budget.

No more national security leaks.

No more criticism of Israel, ever.

A successful transition to Afghan security forces by the end of 2014.

No more cheating by China on trade issues.

"Conditions" will be placed on aid to Egypt

On Iran, "Sanctions must be enforced without exception....Negotiations must secure full and unhindered access for inspections....There must be a full suspension of any enrichment, period."

Hmmm. #1 requires action by Congress, not the president. #2 sounds great, but Romney would be the first president in history to do this. So color me skeptical. #3 I believe, though it probably won't matter much in terms of actual policy. #4 is basically what Obama is already working toward. #5 is pretty vague. #6, ditto. And #7 isn't really very different from Obama's current policy either.

In other words, Romney will talk tougher than Obama, but not really do anything very different. At least, that's my takeaway from the actual policy content of his speech. Anybody else have a different take?

In remarks that may prompt accusations of racial insensitivity, one suggested that Mr Romney was better placed to understand the depth of ties between the two countries than Mr Obama, whose father was from Africa.

“We are part of an Anglo-Saxon heritage, and he feels that the special relationship is special,” the adviser said of Mr Romney, adding: “The White House didn’t fully appreciate the shared history we have”

I dunno, folks. That first paragraph was pure editorializing by the Telegraph reporter. Only the second paragraph comes from the Romney advisor. So why did he use the term "Anglo-Saxon"? At a guess, because he was talking off the cuff, wanted some kind of phrase that suggested the U.S. and Britain have a shared history — which we obviously do — and that's what popped out. It was a mistake, but it's the kind of trivial mistake that happens when you're talking without notes.

As for the swelling tide of suggestions that this was a racial dog whistle, color me dubious. Does anyone seriously think that the Romney campaign decided that the best way to send a message to Southern whites was via a quote to a London newspaper? That's a tough sell.

I guess it's nonetheless tempting to say that this is no more than Romney deserves, given his campaign's continuing grim-faced mendacity over "you didn't build that." And in some cosmic sense, that's true. But in every other sense it isn't. This was, very slightly, a poor choice of words. Unless the Romneybots repeat it, that's all it is.

In 1985, after he was forced out of American Express, Sandy Weill went on an acquisitions tear. He took over a consumer finance company, then acquired an insurance company, then a retail brokerage, then Travelers Insurance, then another brokerage, an investment bank, and finally a merger of his entire empire with Citigroup. But that last step required more than money. Merging an investment bank with a commercial bank required a repeal of Glass-Steagall, the New Deal law that had broken up commercial and investment banks in the first place. So Weill went to work, and a year later Glass-Steagall was gone. Sandy Weill was, in a very real sense, the midwife of repeal, or, as he preferred to call himself at the time, "The Shatterer of Glass-Steagall."

Weill did a 180 on CNBC's Squawk Box this morning, saying that he now believes big banks — like, presumably, Citigroup — should be broken up:

What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.

Sandy Weill advocating for the reinstatement of Glass-Steagall is among the biggest flip-flops imaginable. (In political terms, it would be akin to Rick Santorum announcing he was becoming a GLAAD spokesman.) And when Weill called for a bank breakup this morning, CNBC's incredulous anchors gave him a chance to walk back what they assumed was a spur-of-the-moment gaffe. But Weill didn't budge:

I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable.

To some, Weill's sudden about-face reeks of hypocrisy. Others are picking it over for evidence of ulterior motives. (Could Weill be trying to undermine his former protégé and another too-big-to-fail banker, JPMorgan CEO Jamie Dimon?)

Who knows? It's actually not all that uncommon for elder statesmen who are no longer running things to have a change of heart, and it seems likely that's what's happened here. And like other similar U-turns, it probably won't have any impact at all. Nonetheless, it's pretty intriguing. When even Sandy Weill thinks banks have gotten too big to fail, is there anyone left to disagree?

Britain is now in its third straight quarter of GDP shrinkage. Spanish bond rates have rocketed past 7.5%. German ministers are talking openly about letting Greece exit the euro. American Republicans are threatening yet another debt ceiling standoff. And the Fed and the ECB are still twiddling their thumbs, "standing ready" to act if they need to.

Several states have said that they don't plan to sign up for Obamacare's expansion of Medicaid now that the Supreme Court says they don't have to. Assuming they stick to their guns, what are the likely budgetary implications of this?

On the one hand, the federal government saves money if there are fewer people enrolled in Medicaid. So that would bring the cost of Obamacare down. On the other hand, some of the people who are no longer going to be eligible for Medicaid will probably choose to buy subsidized private insurance via the exchanges. That's more expensive than Medicaid would have been, which raises the projected cost of Obamacare.

So we're saving money. But wait! The American Action Forum also released an estimate today, just for the six states that have already promised to opt out, and it looks like this:

Decreased cost of Medicaid: -$120 billion

Increased cost of subsidies: $195 billion

Miscellaneous changes: -$3 billion to +$5 billion

Net difference between 2014-2021: $72-80 billion

There are some different assumptions at work in these two estimates. But what's important isn't the difference in amount, but the difference in sign. CBO projects a net cost decrease for each state that opts out, while AAF projects a net cost increase.

In other words, we still don't know how this will play out. Stay tuned.

Matt Yglesias isn't sold on my idea that if we were forced to make a tradeoff, we'd be better off reducing our K-12 funding and putting the money into increased funding of pre-K programs:

I think a lot of the thinking about the efficacy of pre-K education is based on looking at the best performing programs while thinking about K-12 tends to be informed by thinking about the typical program. But in both cases quality matters. The best charter school networks in America really do seem to be incredibly effective at teaching children, but as charter school critics point out the average charter school's performance is merely average. The pre-K results look pretty similar to me. The best programs get amazing results, but lots of programs are non-amazing in practice.

I don't want to write a long post about this, but I do want to briefly explain the two beliefs that inform my thinking about this:

First, I don't believe that K-12 education is in a crisis. This doesn't mean that I think we should listlessly accept the status quo. I'm very much in favor of more experimentation with charter schools, more research into effective teaching methods, and so forth. Nonetheless, there's very little reason to think that K-12 education has been sliding into an abyss over the past few decades. In fact, on the NAEP, the best regarded national test of math and reading, the evidence is pretty clear. No matter how you cherry pick the data, today's kids are either doing substantially better than kids of the 70s or, at worst, doing about the same. I don't actively favor reduced funding for K-12, but I don't think it would be any kind of disaster either.

Second, the problem with pre-K isn't a scarcity of super high quality programs. It would be great to have those, of course, and we should work on getting there. But for now, our immediate problem is a scarcity of even mediocre pre-K programs. The evidence on pre-K doesn't suggest to me that small children need exceptional programs, it suggests that they need something more than sitting around watching The Lion King all day. That's where we need to focus our attention. Too many poor and working class kids get virtually no pre-K care at all, and there's now a ton of research showing that this is permanently devastating to cognitive development. Simply putting them into decent programs would have a huge effect.

It's possible I'm wrong on either of both of these points. I'm happy to hear arguments. But if I were starting from scratch and you gave me the following two options:

$500 billion per year on K-12 education and $50 billion per year on pre-K.

$400 billion per year on K-12 education and $150 billion per year on pre-K.

I would choose Door #2 without any hesitation. By the time they finished high school, kids in the second system would almost certainly be better off on average — better educated and better prepared for life, with fewer behavioral problems, fewer drug problems, and fewer teen pregnancies — than the kids in the first system.